Did financial journalists spot the economic crisis?

The Economist examines whether business journalists wrote enough about the issues leading up to the economic crisis, contemplating a new book of essays that asks whether financial journalists were to blame for abetting, or not spotting, the financial crisis of 2007-08.

The Economist writes, “A related problem is that of asymmetry of information. When writing about the complex structured products at the heart of the credit boom, journalists had two main sources: the bankers who devised them and the credit-rating agencies who analysed them. Neither was wholly independent. Academic papers did start to emerge about the riskiness of this lending in early 2007, but by that stage there were already signs of a bursting bubble. Nor was it possible for journalists to know who owned the most risky tranches of such products; that information was not public. When regulators announced that the financial system had become less risky because securitisation had diversified the ownership of mortgage debt, it was hard for newspapers to prove them wrong.

“Another issue is that newspapers tend to report on what has recently happened, not what might happen. After 40 days of sunshine, journalists will be writing about water shortages and forest fires, not about the risk of floods. In a booming economy, the bulk of articles will be explaining why things are going well. This can, of course, lead to a feedback loop in which positive stories boost investor confidence, spawning more positive stories. Readers do not always welcome contrarian views: those commentators who decried the excesses of the dotcom bubble were often told they “just didn’t get it”.

“One final criticism is that journalists get captured by those they cover, subconsciously absorbing their world view. Many financiers would disagree: Buttonwood once spent an uncomfortable hour on stage, along with colleagues from rival papers, being berated by hedge fund types about negative coverage of their industry. Familiarity with the financial markets tends to breed, if not contempt, then a healthy degree of scepticism.”

Read more here. The book is “The Media and Financial Crises: Comparative and Historical Perspectives” and is edited by Steve Schifferes and Richard Roberts. Disclosure: I wrote one of the essays in the book.